Tag Archives: psychology

Trading addiction and its antidote

Traders

I have been running workshops couple of times in a quarter and get this question a lot – Is trading the markets an obsession/addiction? – Answer is both YES and NO.

Most of the books/articles/trading world luminaries dont talk about addiction a lot. This topic is shied away mostly. In my opinion, it is as real as it can get. So, let us delve deeper into it – embrace yourselves for a long post 🙂

Introduction

What is addiction actually? One of the definition says “Addiction is the repeated involvement with a substance/activity, despite the substantial harm it now causes, because that involvement was/is pleasurable and/or valuable.”

Let us look at it in trading perspective – When a person starts trading the markets, it is usually an harmless regular activity. When a trader opens the screen – he is welcomed with ticks moving every second and a possibility of making lacs every minute unfolds infront of him. Fair enough. But please read the last sentence again – “possibility of making’. This is what gets a trader hooked with the market instantly.

Trading and sleepless nights

Watching SGX nifty/DOW in the night (even though the trader knows that he cant do nothing when our markets are closed) is not just because of having positions more than they can handle. It is also due to the fact that the trader is addicted to watching everything related to markets. He just cant help it.

Many argue that only losing traders do this kind of watching activity. Not exactly – it is not about winning or losing. Typically, addicted traders absolutely have to be in the markets at all time – they feel that they have to assimilate all the information they could. They feel that they need to be trading every single day. No exceptions – it is like that wound that itches. You have to scratch it 🙂

Trading and stigma around money

Our brain acts differently when it ‘anticipates’ monetary reward. Behavioral psychology long ago demonstrated that the mind’s ability to choose rational thrills offering positive rewards over more intense thrills offering ridiculous, negative rewards is deplorable at best.

Usually addiction with alcohol/drugs or anything for that matter is a sickness but trading addiction is a bit different- the keyword separator here is ‘Money’. There is a social stigma around money albeit a big one. Folks will tell you everything about the most intimate details of their lives, but they will not tell you about their money – How much they have/How much they want/What they think about others who have more or less money than they do.

Actually, answers to these questions would reveal what they really think about money – What money really means to them? People have more feelings of shame, guilt, greed/lust around money than perhaps any other thing.

Trading and addict’s mindset

When the market opens, a typical addicted trader would feel like this – “Let me just put on a short trade as overnight DOW was red and Nifty has moved 50 points from the open. If I just chase it just this one time, it should be OK because it makes me feel so good when I see the price going down, and I am convinced that I can make a killing on this one. Why should I wait for the price to come to me? Waiting is for losers. Maybe the price wont pullback and I would have missed it all. There’s no fun in that – so, lets jump into the trade”

This feeling is supported by excess secretion of dopamine and the ‘feeling of high’ kicks in immediately. The possibility of making money is enough to kick dopamine – we dont have to actually make money. Well, it’s all good and wonderful until it isnt. Because the trader chased the trade, and market in its natural way of ebbing and flowing, comes down and the trader is in a loss right now.

Now, here comes the best part – the brain registers losses 5 times more intensely than it feels gains. A loss of 1 lac will feel like 5 lacs. Chasing caused pain, and now the pain is financial/physical and psychological. Immediately, dopamine shuts down and the fear begins to pop up in the brain. This leads to an emotional roller coaster in a traders mind – a feeling of high followed by low. Markets can bring this effect upon unseasoned/impatient traders very easily and things go south psychologically pretty fast.

It is important to understand that addicts dont know when to stop trading and when to not jump. This cycle keeps repeating. If you have experienced this before or know someone who has gone through this cycle, this is what is happening in the background.

Trading addiction and research

Two professors from University of California, San Diego (UCSD) did a research on stock market fall and the hospital admission rates. Their research says that if the market goes down 1.5%, there is a rise of patients in the hospitals by 0.28% on the same day (in the evening).

This research was mind-boggling, to say the least. So, the sickness can be physical not just psychological.

Full research paper here –

https://pdfs.semanticscholar.org/4111/4bea0b59b220f6d3c3575b7a8a19729db88d.pdf

Antidote to trading addiction

In my opinion, ‘following a well structured plan’ is the best antidote to this issue. Faith in our plan brings patience and patience is a key ingredient in following a well-defined plan.

Create a rigid plan (well thought out one) that has no ambiguity and follow it to the T. This is the only way out of despair and addiction with trading. The trading plan must be part of you – based on your psychology. Otherwise, it will be sacrificed for whims and moments of weakness.

Here is a blogpost i wrote on trading plan –

Basic pillars of trading success

As long as you work your plan, the plan will work for you and you will reach your goals eventually. There is no “get rich quick” plan.

Happy trading all !!

Achilles heel of a Discretionary trader

Discretionary trading

Achilles’ heel was an unguarded weakness that ultimately brought down a hero of Greek mythology and this post is an attempt to understand the things that has to be kept in mind while designing a trading methodology as a discretionary trader.

As many of you know that am a mechanical(rule based) trader, my trading day is pretty monotonous and boring, many a times. The other group of traders are often called as ‘discretionary traders’. Both groups have their advantages/disadvantages and one should follow what they are comfortable with. At the end of the day, both discretionary and systematic traders have the same goal – making money.

What is discretionary/mechanical trading?

Discretionary trading is decision based trading – when the trading idea shows up in the charts, the trader decides(at that moment) whether to take the trade or not based on current market conditions. Discretionary trading does not mean random trading. Every trader(mechanical or discretionary) has a methodology to enter/exit the market – there are no two ways about it. For example, even if all the conditions are met for a trade, a discretionary trader will not take the trade as volatility is too low (current market condition) – so, basically the trader decides to let it go seeing the current market condition.

On the other hand, Mechanical trading is driven by rules. The trader do not make any decision on taking the trade but the system does. If A happens, then the trader go long and if B happens, the trader goes short. There is no element of decision making involved by the trader as everything is planned out beforehand and the trader just has to execute those trades.

Designing a trading methodology as a discretionary trader

There are certain things discretionary traders should keep in mind when they design their system. More often than not, the psychological pressure of making the ‘quality’ decision of whether to take the trade or not can overwhelm a discretionary trader. To understand this behavior, we need to analyze how our brain works.

A. How brain works?

Evolution has effectively given us (human beings) a dumb brain and a smart brain. The smart brain runs the show most of the times unless a threat is present/perceived and consequently, the dumb brain takes over. Why? The reason is very simple – Dumb brain is faster at making simple/resolute decisions. This avoids people taking a long time on making a choice as time is critical in predatory situations. If we take too much time to take a decision on ‘fight or flight’ situations, there is a good possibility of ending up in the jaws of a predator 🙂

B. Markets are there to get me

With this understanding in mind, one can easily comprehend why this could create a problem in trading as our natural responses can be inappropriate and the way we view/assess info changes when the dumb brain takes over.
Our brains are built to handle belligerent situations and hence, even in a normal situation in trading (like a loss – by the way, many dont consider trading loss as normal 🙂 ), we tend to do things like making “revenge trades”, which is treating the market like an adversary.

Think about it for a second – this is tantamount to curve fitting data so that it fits our trading model but only here, we are fitting the market to how our behavior and natural responses are designed to interact with predators. This is exactly why we see people saying ‘Markets are there to get me’

C. Demo trading and tunnel vision

As a discretionary trader, when we do demo trading of our ideas, we almost always get superlative results. The reasons could be multi-fold but the important one is so evident. When we practice in a non-stressful situation, we evaluate our success based on how our smart brain handles the situation. Under stress, in real trading, we might find that we fail to notice things that are obvious when we look at the same information after the stress has passed. People tend to overlook/ignore information that is contradictory to their analysis of the situation. In behavioral science, this is often called as “tunnel vision“.

Let us sit on this ‘tunnel vision’ for a moment. Like the airport traffic controller who ignores contradictory information (as he is affected by stress), traders fail to exit a losing trade, because our discriminative attention ignores things that indicate it’s time to get out of the trade. Practice (or demo trading) does help, but many traders find that their behavior is different under stress.

So, when a discretionary trader designs/practices a system, he needs to consider human behavior, psychology, and the human factors that were discussed here. In another post, i will discuss the difficulties in being a mechanical(systematic) trader.

Final thoughts

As it generally happens in any endeavor specific to a competitive pursuit, people end up with hallowed beliefs without subjecting them to rational scrutiny. The subject of ‘which style of trading is better’ is one such associated with the business of trading and is a favorite ‘peg to hang’ blame for failure in becoming a successful trader by many.

This blogpost does not favor one over the other – Pick the one that best suits you and pursue trading in that direction.

Happy trading all !!

Great lesson from Mahabharata – Visualization

Visualization

Most of you already know that am not a religious person but the mythological books can teach us many life lessons. So, my reading habit obviously gravitates even towards mythological stories/ books.

One such lesson can be learned from Mahabharata – it is about visualization.

What is Visualization?

Visualization is simply a mental rehearsal. We create images in our mind of having or doing whatever it is that we want. Visualization techniques have been used by successful people to visualize their desired outcomes for ages. The practice has even given some high achievers what seems like super-powers, helping them create their dream lives by accomplishing one goal or task at a time with hyper focus and complete confidence.

The typical visualization pattern comes from the sports world, where an athlete would imagine themselves winning a championship or standing on the podium receiving a medal.

The key to visualization is to visualize that we already have what we desire. This is simply a mental trick. Rather than hoping we will achieve it, or building confidence that one day it will happen, live and feel it as if it is happening to us right now. On one level, we know this is just a mental trick, but the subconscious mind cannot distinguish between what is real and what is imagined. Our subconscious mind will act upon the images we create within, whether they reflect our current reality or not.

Elite athletes use it. The super rich use it. And peak performers in all fields use it.

Visualization in Mahabharata

After losing in a game of dice, the Pandavas were exiled to the jungles as per the bet waged. So, one of those days, Arjuna – the great archer was eating his dinner in the light of an earthen oil lamp, when a gust of wind
extinguished the flame. Arjuna continued to eat, his hand accurately reaching his mouth every time he ate a morsel of grain in the dark. At this exact moment, a sudden flash of thought embraced his mind.

If it was so easy to accurately place a morsel of food in his mouth, due to force of habit, the food not going into his eyes or nose by mistake, why was it so difficult to aim and shoot down a target in the dark ? This fired him up and the restless soul set about practicing archery in the dark, after staring at the target all day in the sunlight.

The mission was very clear and simple – the mind should be trained to know where to shoot from memory, just as it knew where to guide the hand containing a morsel of food in pitch dark. After months of rigorous practice, twanging his bow all night, for months, Arjuna attained mastery of the dark. The hard work paid off and helped the Pandavas win the battle of Kurukshetra years later. This is sheer Neuro linguistic programming (NLP) in work and ofcourse a lot of visualization before entering the actual arena.

Key take way and usefulness in trading

We all are Arjunas but we just lack something important – a sheer target practice. The mind can and should be trained. Samurais train with their Katanas thousands of times before attaining mastery of the sword. History tells us again and again that it can be done.

In trading terms, Visualization can help us cope with stressful situations (like visualizing to stay calm when we are in a trade) and to reinforce good habits. If one has issue in pulling the trigger/exiting early/jumping the gun, Visualization can be immensely helpful.

Thoughts are things and they create the beginnings of getting any result. The thought process includes not only what we’re telling yourself, but also the pictures that those thoughts summon.

Happy trading all !!

Getting out of comfort zone

Comfort

We have often heard successful people mentioning in their speeches/articles that one should ‘Get out of their comfort zone’ to taste success. What this phrase really means?

If we really break down the phrase “Getting out of your comfort zone” it means doing things that we don’t feel comfortable with doing.

Historical references

1. In the 3rd century B.C, General Xiang Yu sent his troops across the Yangtze river to fight the Qin dynasty. While his men slept, he ordered all his ships to be set afire. Basically,they cant go back quitting. There is only one way ahead.

Next day he told them, you now have a choice – fight to win or fight to die. This technique was followed by the Spanish conquistador Cortes in the Sixteenth century in Mexico.

2. In World war – II, Group Captain Adolph Gysbert “Sailor” Malan of the Royal Air Force instructed rookie pilots – if you want to be a crack fighter pilot lad, learn to ditch your parachute !!

3. In Indian history, we have a great example of the battle that happened to capture Singhad fort. After the fall out of Tanaji, his Brother Suryaji cut the ropes with which the troops entered the fort and addressed them ” Either die fighting or Jump off the fort and die – Your choice” This happened around 1670 under Great Shivaji in the battle of Singhad fort near Pune.

Behavioral references

Psychology professors Dan Ariely (he is my personal favorite) and Jiwoong Shin conducted extensive tests on subjects on why people cling onto multiple dating. They found that male and female subjects often latched on to multiple dating partners, refusing to commit to a formal relationship for the fear of losing the comfort of other date partners. They wanted the “safety” or “comfort” of numerical strength.

Often in life, we are required to burn our ships like General Xiang Yu to cut out the option of retreat from a difficult situation as a measure of self-motivation. In extreme circumstances, ditching our parachute like Group Captain “Sailor” Malan advocated becomes necessary to come out of our lazy, comfort zone.

Disclaimer: This tactic however, needs to be extremely/well thought-out and strategised. Cannot be applied to every situation in life – extreme due diligence is required !!

Nevertheless, as they say, “Life begins at the end of our comfort zone”. So, lets get out of comfort zone and the whole world is ours to explore 🙂

Never start your trading day with an hungry stomach

Brain

Indian stock market starts at 9:15 am. Well past the usual breakfast time for many. Yes – this post is about food 🙂

Behavioral science has been blessed with many stalwarts. Roy Baumeister is one of them. As a behavioral scientist, he wanted to ascertain whether remaining hungry and / or craving for food (though not starving) impacted a human being intellectual performance. As it goes with many researchers, he conducted an experiment.

Details of the Experiment

Two batches of 30 students each, of equal IQ and academic performance were selected. They were locked up in separate rooms for 60 minutes and given an exercise to master in mathematics. In both rooms were ovens, which were halfway into baking cakes and cookies. B

Batch # 1 was instructed to stay away from the oven even after it finished baking and was banned from consuming a single cake/cookie. Batch # 2 was instructed to wait for the oven to cool off before enjoying the confectionery.

Result of the experiment

After the designated 60 min timeframe, Roy Baumeister found batch # 1 floundering in their mathematical questions, whereas batch # 2 breezed through it.

Upon interviewing them, students of batch # 1 admitted that majority of their mental energy was spent in fighting their salivating mouths, the aroma of the cakes & cookies and deep emotional craving for the goodies. This was a great revelation.

But, the experiment did not end there. The roles were reversed and batch # 2 was forbidden from savoring the cakes & cookies and their performance went south as well. This is a very critical piece of information that can be used by traders as it can affect our logical decision making capabilities.

Final thoughts

Next time you decide to skip breakfast because you’re in a rush, please do remember this experiment and how our mothers force-fed us before packing us off to school. One might call that as ‘love and affection’ but indirectly, it served us well.

Moral of the experiment – Never start your trading day with an hungry stomach 😊

Roy Baumeister Profile

https://psy.fsu.edu/faculty/baumeisterr/baumeister.dp.php

Happy trading !!